The Psychometric Paradigm of Risk Perception

This time on Trend Following Radio, I speak with Paul Slovic. Paul is president of Decision Research and a professor of psychology at the University of Oregon, and today he talks with me about the science behind risk perception.

To demonstrate how people tend to conflate actual risk with their perceptions of risk, Paul and I discuss a topic that’s always been a hot button issue in the public consciousness — nuclear power.

In the early days of this industry, people were rightfully concerned with the possible mismanagement of such a potentially dangerous technology – concerns seemingly crystallized by the partial meltdown at Three Mile Island in 1979. Similar concerns continue to be raised today, particularly in light of the Fukushima disaster of 2011.

But as Paul explains, neither of these tragedies can completely outweigh the obvious benefits of nuclear power. It’s a case of risk perception to overcome the actual risk posed.

The conversation also focuses on the role of the media in influencing people’s decision-making processes. Why is it, you might ask, that the media spends so much more time pushing negative stories than positive ones?

The answer, according to Paul, goes back to biology. It’s a survival mechanism in human beings that we’re affected far more by negative stimuli than positive stimuli. This makes sense when you consider the external dangers we’ve faced in our evolution.

So today, we tend to harp on the bad things that happen while ignoring the good.

In this episode of Trend Following Radio:

The psychometric paradigm of risk perception

Balancing risk vs. reward

The concept of affect heuristics

How the media sways the public’s risk assessment

Fast vs. slow thinking

Risk in the context of decision making

To begin listening, click play on the video at the top of this page, or below…

P.S. I originally posted this episode of Trend Following Radio, right here.

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About Michael Covel:

Michael Covel has been teaching trend following strategies to individual traders, students, hedge funds, pensions and family offices for the past two decades. He has helped more than 7,000 clients in over 70 countries learn how to make money with trend following. He’s the author of five books, including the international best-seller Trend Following: Learn to Make Millions in up or Down Markets (named best trading book of the last 15 years) and his investigative narrative The Complete TurtleTrader: How 23 Novice Investors Became Overnight Millionaires. His first documentary film is Broke: The New American Dream. Fascinated by like-minded traders that quietly generate spectacular returns, he has uncovered astonishing insights about how they think, strategize and execute their systems. His impressive network of contacts among the best traders in the world has given Michael a unique edge in the world of quantitative trend following investments. Michael is also the voice behind Trend Following Radio, the underground alternative hit that has been as high as No. 2 on the iTunes investing channel, reaching over 3 million listeners across 182 countries and territories. Guests have included Nobel Prize winners in economics (such as Daniel Kahneman and Harry Markowitz) and some of the best traders in the world (such as Ed Seykota and Larry Hite, who have been featured in the famous book Market Wizards).